Working Paper: CEPR ID: DP5921
Authors: David Domeij; Lars Ljungqvist
Abstract: Swedish census data and tax records reveal an astonishing wage compression; the Swedish skill premium fell by more than 30 percent between 1970 and 1990 while the U.S. skill premium, after an initial decline in the 1970s, rose by 8-10 percent. Since then both skill premia have increased by around 10 percentage points in 2002. Theories that equalize wages with marginal products can rationalize these disparate outcomes when we replace commonly used measures of total labour supplies by private sector employment. Our analysis suggests that the dramatic decline of the skill premium in Sweden is the result of an expanding public sector that today comprises roughly one third of the labor force, and that expansion has largely taken the form of drawing low-skilled workers into local government jobs that service the welfare state.
Keywords: employment; private sector; public sector; skill premium; sweden; united states
JEL Codes: E24; J31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| public sector employment (J45) | decline of skill premium (F66) |
| influx of low-skilled workers into public sector employment (J45) | wage compression (J31) |
| wage compression (J31) | decline of skill premium (F66) |
| public sector employment (J45) | wage structure (J31) |
| labor supply dynamics (J20) | wage structure (J31) |
| public sector employment (J45) | changing employment structures (J63) |
| Swedish skill premium decline (F66) | U.S. skill premium increase (F66) |